How on earth is this legal?

[brickwall]

Company A goes into administration. Almost no liquid or physical assets, and owing £750k to creditors, of which >£500k is to HMRC in respect of unpaid VAT and PAYE taxes. Company A’s Directors and majority shareholders are a mother and daughter.

The administrators run a pre-pack process, in which selected assets of Company A (IP, Work in progress, and office equipment) is sold to Company B, for £80k.

Company B:
- Is newly incorporated (incorporated about a month before administrators were appointed for Company A)
- Has a very similar name, and the same address as company A
- Has the same mother and daughter directors and majority shareholders as company A

Can the directors of company A simply walk away from the debts, and carry on afresh with the work now assumed under company B?

I get the concept of limited liability, but if I was a creditor in this situation I’d be pretty pissed off.
(I am not a creditor, but I vaguely know the individuals involved)

[RSTurboPaul]

I think the term 'phoenixing' may be relevant here? lol

Someone I know worked for a company that, remarkably, seemed to need renaming every two years or so for some reason...

[996 Turbo Time]

brickwall said:

Company A goes into administration. Almost no liquid or physical assets, and owing £750k to creditors, of which >£500k is to HMRC in respect of unpaid VAT and PAYE taxes. Company A’s Directors and majority shareholders are a mother and daughter.

The administrators run a pre-pack process, in which selected assets of Company A (IP, Work in progress, and office equipment) is sold to Company B, for £80k.

Company B:
- Is newly incorporated (incorporated about a month before administrators were appointed for Company A)
- Has a very similar name, and the same address as company A
- Has the same mother and daughter directors and majority shareholders as company A

Can the directors of company A simply walk away from the debts, and carry on afresh with the work now assumed under company B?

I get the concept of limited liability, but if I was a creditor in this situation I’d be pretty pissed off.
(I am not a creditor, but I vaguely know the individuals involved)

Sounds about right, unless there's clearly been fraud or a clear case of insolvant trading.

Look at it this way:

The "debt" to HMRC is not a commerical debt, it's unpaid taxes on trading and employment that HMRC would never have received anyway if company A had been wound up months ago, so in reality they've lost nothing.

The remaining debt of £250k will sting the creditors, but any business advancing significant amounts to a small family run company needs to do their due diligence and ensure they are comfortable if the risk. If they didn't do that, then they're adults and have just learned a very expensive lesson. If they did, then it's a business cost.

And in the future, no-one in their right mind is going to advance the phoenix company any significant money, work for them or possibly even trade with it, so the business guru mother and daughter team will get what's coming to them.

[brickwall]

996 Turbo Time said:

brickwall said:

Company A goes into administration. Almost no liquid or physical assets, and owing £750k to creditors, of which >£500k is to HMRC in respect of unpaid VAT and PAYE taxes. Company A’s Directors and majority shareholders are a mother and daughter.

The administrators run a pre-pack process, in which selected assets of Company A (IP, Work in progress, and office equipment) is sold to Company B, for £80k.

Company B:
- Is newly incorporated (incorporated about a month before administrators were appointed for Company A)
- Has a very similar name, and the same address as company A
- Has the same mother and daughter directors and majority shareholders as company A

Can the directors of company A simply walk away from the debts, and carry on afresh with the work now assumed under company B?

I get the concept of limited liability, but if I was a creditor in this situation I’d be pretty pissed off.
(I am not a creditor, but I vaguely know the individuals involved)

Sounds about right, unless there's clearly been fraud or a clear case of insolvant trading.

Look at it this way:

The "debt" to HMRC is not a commerical debt, it's unpaid taxes on trading and employment that HMRC would never have received anyway if company A had been wound up months ago, so in reality they've lost nothing.

The remaining debt of £250k will sting the creditors, but any business advancing significant amounts to a small family run company needs to do their due diligence and ensure they are comfortable if the risk. If they didn't do that, then they're adults and have just learned a very expensive lesson. If they did, then it's a business cost.

And in the future, no-one in their right mind is going to advance the phoenix company any significant money, work for them or possibly even trade with it, so the business guru mother and daughter team will get what's coming to them.

This is helpful, thanks.

I guess you’re right in that no-one in their right mind should advance them any money (so they’d have to put up any working capital themselves).

The HMRC debt is puzzling - this is a business with turnover of £1-1.2M, and staff costs of £850-950k. I don’t know how you end up owing HMRC £500k unless you just don’t pay your VAT and PAYE bills for quite a long time. So people have been employed and gained money in salary, which will (at least in part) have been paid for by not paying the taxes due on it.

What would really grind my gears if I were a creditor is that (potentially) my money would have gone into the hands of the directors/shareholders, by virtue of any salary payments or dividends, and now I’m left nursing a loss while they sit pretty.

Edited by brickwall on Sunday 7th July 00:16

[996 Turbo Time]

brickwall said:

996 Turbo Time said:

brickwall said:

Company A goes into administration. Almost no liquid or physical assets, and owing £750k to creditors, of which >£500k is to HMRC in respect of unpaid VAT and PAYE taxes. Company A’s Directors and majority shareholders are a mother and daughter.

The administrators run a pre-pack process, in which selected assets of Company A (IP, Work in progress, and office equipment) is sold to Company B, for £80k.

Company B:
- Is newly incorporated (incorporated about a month before administrators were appointed for Company A)
- Has a very similar name, and the same address as company A
- Has the same mother and daughter directors and majority shareholders as company A

Can the directors of company A simply walk away from the debts, and carry on afresh with the work now assumed under company B?

I get the concept of limited liability, but if I was a creditor in this situation I’d be pretty pissed off.
(I am not a creditor, but I vaguely know the individuals involved)

Sounds about right, unless there's clearly been fraud or a clear case of insolvant trading.

Look at it this way:

The "debt" to HMRC is not a commerical debt, it's unpaid taxes on trading and employment that HMRC would never have received anyway if company A had been wound up months ago, so in reality they've lost nothing.

The remaining debt of £250k will sting the creditors, but any business advancing significant amounts to a small family run company needs to do their due diligence and ensure they are comfortable if the risk. If they didn't do that, then they're adults and have just learned a very expensive lesson. If they did, then it's a business cost.

And in the future, no-one in their right mind is going to advance the phoenix company any significant money, work for them or possibly even trade with it, so the business guru mother and daughter team will get what's coming to them.

This is helpful, thanks.

I guess you’re right in that no-one in their right mind should advance them any money (so they’d have to put up any working capital themselves).

The HMRC debt is puzzling - this is a business with turnover of £1-1.2M, and staff costs of £850-950k. I don’t know how you end up owing HMRC £500k unless you just don’t pay your VAT and PAYE bills for quite a long time. So people have been employed and gained money in salary, which will (at least in part) have been paid for by not paying the taxes due on it.

What would really grind my gears if I were a creditor is that (potentially) my money would have gone into the hands of the directors/shareholders, by virtue of any salary payments or dividends, and now I’m left nursing a loss while they sit pretty.

Edited by brickwall on Sunday 7th July 00:16

It's possible to defer PAYE and VAT payments for up to a year pretty easily, especially since Covid hit. It was routine for many businesses to do that even if they weren't distressed as it was essentially an unsecured interest free loan.

And yes, salaries were probably paid out of taxes owed, but again, who really loses in that situation? People were employed for longer than they would have been otherwise and all the government loses out on is a bit of tax owed, so no "real" cash cost as they wouldn't have got those taxes anyway.

As for the creditors, well you would have looked into the company before loaning or advancing it any significant money and ensured you had security if they failed to pay, wouldn't you...?

[Nick Forest]

996 Turbo Time said:

And in the future, no-one in their right mind is going to advance the phoenix company any significant money, work for them or possibly even trade with it, so the business guru mother and daughter team will get what's coming to them.

Exactly this…and the following should apply “ fool me once, shame on you; fool me twice, shame on me”

[bristolracer]

I’ve seen a supplier supply company B on a cash on delivery basis after company A went bust on them.
Their philosophy was that profits made on continued sales to company B would eventually cover the losses made from company A.

[brickwall]

996 Turbo Time said:

It's possible to defer PAYE and VAT payments for up to a year pretty easily, especially since Covid hit. It was routine for many businesses to do that even if they weren't distressed as it was essentially an unsecured interest free loan.

And yes, salaries were probably paid out of taxes owed, but again, who really loses in that situation? People were employed for longer than they would have been otherwise and all the government loses out on is a bit of tax owed, so no "real" cash cost as they wouldn't have got those taxes anyway.

As for the creditors, well you would have looked into the company before loaning or advancing it any significant money and ensured you had security if they failed to pay, wouldn't you...?

That’s all fine, particularly with regards to the commercial debt. And I know that some of the commercial debt (bank loans) were secured against bank deposits with the same bank.

To be clear - I’m not a creditor. One could argue I’m a sort of competitor, we at least operate in a similar space.

It’s the HMRC bit - what’s to stop these charlatans doing it again? There doesn’t seem to be a mechanism for HMRC to stop people racking up big VAT and PAYE bills (by virtue of taking money in and paying salaries…including to themselves), then just folding the company when those debts can’t be paid.

As you say - any other creditor wouldn’t advance them a penny.

[Puzzles]

Not sure why the tax payer should lose out?

[996 Turbo Time]

brickwall said:

996 Turbo Time said:

It's possible to defer PAYE and VAT payments for up to a year pretty easily, especially since Covid hit. It was routine for many businesses to do that even if they weren't distressed as it was essentially an unsecured interest free loan.

And yes, salaries were probably paid out of taxes owed, but again, who really loses in that situation? People were employed for longer than they would have been otherwise and all the government loses out on is a bit of tax owed, so no "real" cash cost as they wouldn't have got those taxes anyway.

As for the creditors, well you would have looked into the company before loaning or advancing it any significant money and ensured you had security if they failed to pay, wouldn't you...?

That’s all fine, particularly with regards to the commercial debt. And I know that some of the commercial debt (bank loans) were secured against bank deposits with the same bank.

To be clear - I’m not a creditor. One could argue I’m a sort of competitor, we at least operate in a similar space.

It’s the HMRC bit - what’s to stop these charlatans doing it again? There doesn’t seem to be a mechanism for HMRC to stop people racking up big VAT and PAYE bills (by virtue of taking money in and paying salaries…including to themselves), then just folding the company when those debts can’t be paid.

As you say - any other creditor wouldn’t advance them a penny.

HMRC aren't advancing them a penny? Taxes owed are very different to a cash loan or credit on purchases.

HMRC doesn't lose anything - if the company didn't employ those people or make those sales (for VAT), then HMRC wouldn't have received anything anyway, so they haven't lost anything meanwhile people have been employed and economic activity occurred that wouldn't have otherwise, so it's actually beneficial for the government in the wider picture.

Think of it this way - rather than the government winding up a company as soon as it can't meet it's monthly payroll or quarterly VAT bill, it allows it to continue trading for up to a year with a tax holiday.

If the company pulls itself out of the mess, great, HMRC gets paid the tax owed. If not, no big deal, the tax was never going to be paid anyway.

Now if there's fraudulent or insolvent trading going on, that's a different matter and there are laws in place to stop that.

[996 Turbo Time]

Puzzles said:

Not sure why the tax payer should lose out?

It doesn't lose out.

If HMRC wound up the company on day 1, it wouldn't get any taxes from days 2 to 365.

If HMRC give a year's holiday on taxes and the company doesn't pay, it still doesn't get any taxes on days 2 to 365.

Deferrment of taxes owed are not the same thing as a cash loan, or even credit on supplies.

[996 Turbo Time]

bristolracer said:

I’ve seen a supplier supply company B on a cash on delivery basis after company A went bust on them.
Their philosophy was that profits made on continued sales to company B would eventually cover the losses made from company A.

Not unusual and this can be a wise business decision - the key bit being the cash on delivery part. If it were me I'd also be charging company B a deposit on the order to cover costs plus premium prices to try to recoup the previous losses.

A really shrewd business person might even consider arranging their contracts to attempt to push company B into insolvency a second time and be left as the major creditor in an attempt to purchase the company out of liquidation for peanuts and vertically integrate them into their own business...

Edited by 996 Turbo Time on Sunday 7th July 11:53

[ATG]

HMRC are not getting money that was owed to them. Clearly they are losing out, which of course means we are all losing out. The idea that the only option left to the firm was to defer tax payments until insolvency doesn't seem likely. Reducing costs by shedding a few staff might well have been an option. Another issue is that this company was competing unfairly with its competitors. The competitors were paying tax, this firm wasn't.

[DaveA8]

I guess because the Administrators signed it off, how much of the £80k will go to the creditors and how much will be sucked out in fees related to the administration is another question.
We were creditors in a prepack and of near £50k, less than £5k went to creditors the rest got disbursed in fees, to this valuer, that debt collector. I often thought that the Administrator must get commission, the company collecting the debts was paid 40% plus vat on successful collection

[996 Turbo Time]

ATG said:

HMRC are not getting money that was owed to them. Clearly they are losing out, which of course means we are all losing out. The idea that the only option left to the firm was to defer tax payments until insolvency doesn't seem likely. Reducing costs by shedding a few staff might well have been an option. Another issue is that this company was competing unfairly with its competitors. The competitors were paying tax, this firm wasn't.

And this is where human intuition falls down.

Taxes owed are not "money". It's a notional figure calculated on profits that never really existed.

It's like me writing you an IOU for a billion quid payable in a year's time. It doesn't instantly make you a billionaire and when I fail to pay, you haven't actually lost a billion quid!

As for unfair competition, perhaps, but then they couldn't even compete without paying taxes so it couldn't have been that much of an advantage and that situation can only go on for around a year normally.

[996 Turbo Time]

DaveA8 said:

I guess because the Administrators signed it off, how much of the £80k will go to the creditors and how much will be sucked out in fees related to the administration is another question.
We were creditors in a prepack and of near £50k, less than £5k went to creditors the rest got disbursed in fees, to this valuer, that debt collector. I often thought that the Administrator must get commission, the company collecting the debts was paid 40% plus vat on successful collection

Administration is a racket for the administrator, but then what's the alternative?

[brickwall]

ATG said:

The idea that the only option left to the firm was to defer tax payments until insolvency doesn't seem likely. Reducing costs by shedding a few staff might well have been an option.

This is the nub of it. I find it really hard to believe that the directors didn’t take any salary in the period the debt to HMRC was run up (given that period is likely to have been 6-9 months+). The net result is that the directors have managed to treat themselves as preferential creditors to HMRC (their salaries got paid, HMRC didn’t).

This is where the line on insolvent trading becomes really difficult.
A very play-it-safe position might have been “liquidity looks a little tight, let’s suspend director salaries for a few months and keep a bigger cash buffer, we can always pay it back when our customers pay their bills”.

But if you can phoenix the company, there seems to be little incentive to take that route - so long as you can reasonably justify that you believed you can pay debts as they fall due then you’re better to keep extracting as much money as you can, because the creditors will wear the loss if it doesn’t work out.

What sticks even more is that in this case most of the consideration for the acquisition of the assets hasn’t even been paid; the new entity have agreed a payment plan with the administrators whereby 30% is paid up front and the remaining 70% is paid in monthly instalments over 2 years. What’s to stop the directors from doing the same again, with these monthly payments being another debt that doesn’t get paid?

[paulrockliffe]

996 Turbo Time said:

And this is where human intuition falls down.

Taxes owed are not "money". It's a notional figure calculated on profits that never really existed.

It's like me writing you an IOU for a billion quid payable in a year's time. It doesn't instantly make you a billionaire and when I fail to pay, you haven't actually lost a billion quid!

As for unfair competition, perhaps, but then they couldn't even compete without paying taxes so it couldn't have been that much of an advantage and that situation can only go on for around a year normally.

This isn't correct, you're missing the next step. Fraudulent business doesn't trade, people buy from legit business instead and HMRC get paid. That is the real loss.

[lizardbrain]

so you can just run a profitable and healthy company, take a salary maybe even pay dividends, never pay tax and just plan for the outset to phenix every years?

Doesn’t sound like HMRC is not losing out to me?

[Countdown]

996 Turbo Time said:

Puzzles said:

Not sure why the tax payer should lose out?

It doesn't lose out.

If HMRC wound up the company on day 1, it wouldn't get any taxes from days 2 to 365.

If HMRC give a year's holiday on taxes and the company doesn't pay, it still doesn't get any taxes on days 2 to 365.

Deferrment of taxes owed are not the same thing as a cash loan, or even credit on supplies.

What about all the employees that had tax/NI deducted from their paye ? Or the customers who were charged VAT?

The directors have collected a huge amount of tax on behalf of HMRC which they haven't handed over.